What is a reinstatement clause in reinsurance?

A reinstatement clause says whether, and on what terms, limit comes back after a layer is used. Free or paid. Automatic or on request. Once, twice, or more. Pro rata as to amount and as to time, or not. Those are fields with spans. The word "reinstatement" in a broker summary is not a formula.

Quota share does not usually reinstate a percentage share; the share stands for the period. Excess of loss and some aggregate covers do. Treaty reinsurance administration treats paid reinstatement premium as an accounting event, not a pricing footnote.

Formula, then cash

Fictional walkthrough: ACME Construction Ltd, acme.example. Layer USD 10,000,000 excess of USD 5,000,000, original premium USD 400,000, one reinstatement at 100 percent of original premium, pro rata as to amount only. An ACME loss exhausts the full USD 10,000,000 of layer. Capacity can come back. Reinstatement premium due is USD 400,000. If the loss used only USD 4,000,000 of the layer, a pro-rata-as-to-amount clause takes 4,000,000 / 10,000,000 of USD 400,000, which is USD 160,000, unless the wording says otherwise. If it is also pro rata as to time and the loss falls on 1 July of an annual period, time pro rata is a second fraction. Extract both. Do not apply "we always reinstate at 100 percent" because that is what the last programme did.

Source-grounded extraction that writes "two reinstatements" without the premium basis has not extracted the clause. Cedent reporting should show the reinstatement premium on the accounts with the loss that triggered it. Booking a round number with no clause span is the same failure as filling a missing hours clause.

If the clause is free reinstatement, the accounts show capacity restored and no extra premium, with the same span. Calling a free reinstatement paid because the spreadsheet had a premium column is a false cash item.

What gets reinstated

Occurrence limit, event limit, and aggregate limit are different objects. Reinstating ACME's per-risk layer after a USD 10,000,000 recovery does not automatically reset a USD 20,000,000 annual aggregate unless the wording says the aggregate reinstates too. Cat programmes often reinstate event limit for a second storm. They may not give you a third. Count remaining reinstatements as a field that decrements, not as a heading that stays on the cover all year.

Hours and event definition decide whether two wind dates are one event (one bite of limit) or two (two bites, maybe two reinstatements). If the hours clause is missing from the pack, you cannot administer reinstatement on a cat loss. ACME's facultative hours gap is the same class of problem: no window, no event, no honest second loss.

Timing traps

Reinstatement premium is often due with the recovery, or as specified. Year of account for that premium follows the wording, not the day someone remembered to invoice. A November ACME exhaustion with reinstatement billed in January can still be this treaty. If the inbound file has no trigger loss reference, the premium is an unallocated cash item.

Do not treat reinstatement as parametric. It is not a station reading. It is capacity maths on an indemnity layer. Do not treat it as ceding commission. It is extra premium, often, not an allowance back to the cedent.